The Choice of Majors as a Signaling Device

Abstract

This work analyzes the ability signaling hypothesis using a rich set of data of a homogeneous population –Business and Economics graduates of University X– who share similar occupations in the labor market. After studying three years of a common core curriculum, students must choose between either a Business or an Economics major. The work investigates if the choice of major is employed by the labor market as a signal of ability and of expected productivity, and if this is reflected in differences in the earnings profiles of graduates of each field. Given the detailed nature of the data, we employ an unusually rich measure of ability, namely the grades obtained in the core curriculum. This work presents multiple evidence in favor of this hypothesis. The evidence is based on seven empirical results, properly derived from a simple theoretical signaling model. The empirical facts support the sig-naling hypothesis under the assumption that an individual’s ability is gradually revealed to the labor market as experience increases.